Why gasoline prices are headed even higher

OPIS sees U.S. gasoline prices reaching a peak of $3.75-$3.95 this year.

SAN FRANCISCO (MarketWatch) — Gasoline prices at the pump have climbed every day for the past 21 days — and they’re not going to let up anytime soon.

On Thursday, the average U.S. price for a gallon of regular gasoline stood at $3.555, making it the most expensive average ever for that day and the highest level since Oct. 26 of last year, according to AAA. See AAA’s Daily Fuel Gauge Report.

The price has risen 26.3 cents, or about 8%, this year, steeper than the 6.2% increase for the same period in 2012 and 1.6% rise for the same period in 2011, according to the motorist and leisure travel group.

And as the gasoline market set all sorts of milestones, analysts offered more reasons why prices are headed even higher over the next few months.

“This is a very early rise,” said Tom Kloza, chief oil analyst at the Oil Price Information Service. “January has tended to be a quiet month through the years. The rally really began in earnest around Jan. 15.”

Prices saw an “off-season” bottom on Dec. 20 when they averaged $3.219 a gallon, he said, so since that bottom, they’ve rebounded by about 33 cents — “with more increases to come.”

Contributing factors

Consumers haven’t even seen the worst, with a perfect storm of factors driving higher prices.

Many of the issues lifting fuel prices higher are common, but they “seem to have combined at the right time,” said Matt Tormollen, president and chief executive officer at FuelQuest, a Houston-based fuel management software provider.

Typically at this time of year, refineries begin their switch to the more environmentally-friendly summer-blend gasoline and perform maintenance, which “temporarily restricts supply and drives up prices,” he said.

Some refineries have also announced unexpected shutdowns or closings, leading to even tighter refining capacity, said Jeff Lenard, a spokesman at the National Association of Convenience Stores (NACS), a trade group for an industry that sells 80% of the nation’s gasoline.

The good news is that additional crude production from shale oil in North Dakota and Texas are seen reducing price volatility in WTI crude prices and that, in turn, “would offer more stable prices for refiners,” he said.

Waiting for the peak

Even with all of the factors driving gasoline prices significantly higher, analysts say the cost of the fuel hasn’t peaked yet.

Kloza said that while the pace of increases in the last three weeks, of nearly 10 cents-per-gallon per week, should “lose some steam,” the market will “almost certainly see an uptrend [in prices] prevail into March and perhaps into April.”

“The peak maintenance [for refineries] is probably weeks away, but prices have moved up as professional traders have anticipated this work,” he said.

California, in particular, has seen a lot of early maintenance and prices have already climbed “drastically there and they will climb some more,” said Kloza.

Other price “hot spots” this year, he said, include the Northeast — “where imports are lower and shipping is scarce to move gasoline from the Gulf Coast to New York Harbor — and the Great Lakes, where two of the largest regional refineries will be down for extensive maintenance in late March or April.”

He predicts a national price peak in the $3.75 to $3.95 a gallon range, but the “hot spots” may see a “brief stint above $4 a gallon.”

AAA’s Green, on the other hand, doesn’t expect the national average price to reach as high as last year’s peak of $3.94, which it saw in April.

He sees a peak this spring between $3.60 and $3.80, with prices likely to “surpass $4 per gallon in the very near term” in places like California or New York.

That’s not a big stretch. On Thursday, AAA reported the average price for regular gasoline in California at $3.988.

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